TSP Rollover to IRA: Pros, Cons, and When It Makes Sense

If you have left government or military service in recent years, then there is a good chance you still have a Thrift Savings Plan (TSP) account in your name. Consolidating financial accounts can make planning and management easier, but the TSP is in a league of its own among retirement investment options, largely due to some of the lowest expense ratios available anywhere. So keeping your assets in the TSP may not be a bad option.

That said, sometimes it makes sense to simplify your financial life and roll your investments into fewer accounts. This guide covers the pros and cons of a TSP rollover, when it makes sense to do so, and when you should leave your money in the TSP. As with all major financial decisions, there is no one-size-fits-all approach. Each situation needs to be reviewed on its own merits.

Any financial decision you make should be consistent with a financial plan that reflects your values and goals.

What Should You Do with Your TSP After Military Service?

The first thing you will need to do is determine if your assets are eligible for distribution. The TSP has certain eligibility criteria, so contact customer service through the ThriftLine if in doubt.

Once you determine your funds are eligible for distribution, you need to decide what to do with those funds. Your main options include:

• Leaving your funds within your TSP account

• Rolling your TSP into an IRA

• Rolling your assets into a 401(k) plan at your new employer

• Withdrawing your funds, though watch out for early withdrawl penalties

• Rolling your funds into a qualified annuity

The TSP’s Cost Advantage

Before diving into the pros and cons of a rollover, it it worth understanding just how competitive the TSP’s fees are. The TSP has some of the lowest expense ratios in the investment industry, here is how the core funds compare as of 2025:

G Fund	F Fund	C Fund	S Fund	I Fund
0.049%	0.055%	0.035%	0.057%	0.048%

For comparison, Vanguard, one of the industry leaders in low-cost investing, has an average ETF expense ratio of 0.04% and an average mutual fund and ETF expense ratio of 0.07% as of December 31, 2025. The industry average ETF and mutual fund expense ratio is 0.44%. While Vanguard is very competitive with the TSP on fees, both are significantly lower than the industry average, and most 401(k) plans fall somewhere in between.

The higher the management fees you pay, the more money you give up in total returns. Your investments need to earn greater returns just to end up with the same amount of money after fees.

Pros of Doing a TSP Rollover Into an IRA

Portability and Flexibility

Transferring your funds from the TSP gives you much more flexibility with how and where you invest your money. Here are the main advantages:

Account consolidation

As you depart the military and begin building a civilian financial life, account consolidation can simplify your financial management. If you have already been contributing to an IRA, transferring your TSP into that account may make your overall financial picture easier to manage.

More investment choices

While the TSP offers solid diversification for most investors, there are situations where it is not the right investment vehicle. Rolling into an IRA opens up a much wider range of options, including:

• Real Estate Investment Trusts (REITs)
• Individual stocks and bonds
• Index funds or mutual funds focused on specific industries or sectors
• A self-directed IRA to manage real estate or a closely-held business
• A qualified longevity annuity contract (QLAC)
• And many other investments

Cons of Doing a TSP Rollover Into an IRA

Higher Costs

While some brokerages now offer zero-cost index funds, many include a larger cash allocation that can limit returns. As shown in the expense ratio table above, the TSP’s fees are among the lowest available, rolling into an IRA will almost certaintly result in higher costs.

Tax planning: The Combat Zone Contribution Problem

This is one of the most important and least understood considerations in a TSP rollover, particularly for military members with significant combat zone contributions.

For those who made contributions from tax-exempt combat zone pay, the eventual distribution of those contributions is tax-exempt, even though the earnings on those contributions are not. TSP tracks this information precisely, and you can see it clearly on your account statements.

Here is the problem: when you transfer your TSP to an IRA, most IRA custodians have no system to segregate your tax-free and taxable contributions. Combat zone contributions are the only type of contribution that is truly tax-free, and the TSP is the only retirement plan that accounts for them. Most IRA custodians work with pre-tax and after-tax contributions, not tax-free contributions.

When you shift your TSP to an IRA, your custodian will likely treat the account as follows:

• Traditional accounts will be considered pre-tax
• Roth accounts will be considered after-tax

This means your tax-free distribution may have tax withholdings applied even though it is technically tax-free. You can eventually recover the the withheld money when you file your tax return, but the burden of proof falls on you to clearly document:

• Your deployments and total contributions during those deployments
• That your deployments qualified for tax-free contributions according to IRS Publication 3 (Armed Forces Tax Guide)
• That your rollover and distributions were consistent with IRS Notice 2014-54 (Guidance on After-Tax Amounts to Rollovers)

If you’re not familiar with IRS Notice 2014-54, it’s a doozy. In essence, it means that when you withdraw from a retirement account plan (such as a 401(k) or TSP), and you have both pre-tax and after-tax (or tax-free) contributions, then you MUST make your withdrawals in proportional amounts.

For example, let’s say you have $100,000 in TSP ($80,000 in traditional and $20,000 in Roth). When withdrawing from this account (or rolling over), you must withdraw equally from each account. If you’re rolling over the entire balance, there’s no problem. However, let’s say you’re only drawing out $20,000. You cannot just cherry-pick $20,000 in Roth just to avoid paying taxes.

The IRS mandates that your $20,000 must be in equal proportions from each account. In this case, you would take 80% from the traditional & 20% from the Roth account, or $16,000 and $4,000, respectively. (BTW, TSP accounts for this and will distribute proceeds from your accounts in this manner).

Tired yet? Just wait until you try to manage this on your own, without any assistance from TSP (who is no longer managing your account). You might spend a lot of money to hire an accountant, enrolled agent, or fee-only financial planner to help you wade through this correctly, or even more time & frustration (and possibly money if done incorrectly) doing it on your own. This might be a situation where you decide to leave your money in TSP.

Note: We haven’t yet gotten to the point where there are a lot of TSP account holders who are managing distributions of combat zone contributions. However, when we do, it will be quickly apparent that this will be a big deal for those people who rolled their TSP over into IRA accounts. Perhaps the bigger IRA custodians will incorporate procedures to amend this gap. However, since TSP rollovers count for such a small portion of the overall IRA rollover market ($443 billion for TSP vs. $4.8 trillion for 401(k)s), I wouldn’t hold my breath.

More information on Tax-Exempt TSP Contributions: I encourage you to read the following guide, which explains this in greater detail, including how to roll over a TSP with tax-exempt contributions into a Traditional IRA (traditional contributions and earnings) and a Roth IRA (tax-exempt contributions): Thrift Savings Plan Rollover Guide – How to Transfer Your TSP into an IRA – with Instructions for Tax-Exempt Contributions. This guide can save you a lot of trouble when doing a rollover.

Pros and Cons of TSP Rollover into an IRA

Here are the pros and cons of rolling over your Thrift Savings Plan account into an IRA or 401k:

If You Decide to Rollover a TSP Account into an IRA:

If you decide to roll your Thrift Savings Plan assets into an IRA, then you have a few options to consider. The first thing you will need to do is open an IRA if you don’t already have one. Here is a list of places to help you get started.

Pros and Cons of Leaving Your Investments in the TSP

In Summary – Deciding Which Option is Best For You

There is no right or wrong option. If you prefer a hands-off approach with low fees, or if you have a large amount of tax free contributions, then you may wish to keep your funds in the Thrift Savings Plan. If, however, you have a hands-on investing approach, or simply wish for more investment options, then rolling your TSP assets into an IRA may be a better option for you. Be sure to investigate your options thoroughly and make the best decision based on your investment needs and risk tolerance.

Regardless of your decision, it’s important that you not make this decision too quickly. The last thing that you want to do is jump from the frying pan into the fire. Instead, the decision to roll your TSP into an IRA should be part of a methodical, long-term financial plan that is consistent with your values and financial goals.